Should the State of India's Private Shipyards Affect Its $8-Billion Search For Submarines?

Should the State of India's Private Shipyards Affect Its $8-Billion Search For Submarines?

The defence ministry must balance and leverage the strengths of both public and private shipyards through appropriate distribution of work

by K.S. Subramanian

Recent reports in the media about the nomination of Mazagon Docks Shipbuilders Ltd (MDL) for the construction of submarines under the much-delayed Project 75(I), costing approximately $8 billion, have evoked strong criticism from certain quarters, particularly since this was supposed to be the flagship program under the much publicised ‘strategic partnership’ initiative of the government.

Some have even gone to the extent of terming this development the “death knell for private shipyards” and have criticised the decision to go with MDL despite its past record of delays and cost overruns. With so much criticism concerning the vital submarine arm of the Indian Navy, it would be worth examining the case in detail, understand the nuances of the issue and make an informed assessment.

To give a brief background, the Acceptance of Necessity was accorded by the Ministry of Defence (MoD) for six conventional submarines under Project 75(I) in August 2010. These submarines were to be fitted with air independent propulsion (AIP) for extended range and enhanced stealth features to avoid detection. Deliveries under this project were expected to commence in 2020 so as to augment and replace the ageing submarine fleet of the Indian Navy. Four prospective foreign collaborators – Rosoboronexport (Russia), DCNS/Naval Group (France), Thyssen Krupp (Germany) and Kockums (Sweden) – expressed interest in the project against the Request for Information issued by the MoD in September 2010.

As per the original plan, two submarines were to be built abroad in the selected foreign collaborator’s shipyard, three were to be built at MDL and one at Hindustan Shipyard Ltd (HSL).

HSL, which was taken over by MoD in February 2010, was selected for the project due to it’s excellent infrastructure and with a view to develop a second line for submarine construction in India. However, despite several rounds of discussions to evaluate offers received from the prospective collaborators by the MoD, no headway was made in the project.

Enter Strategic Partnership Policy

In late 2014, with the project still in a limbo, the government decided to execute Project 75(I) through private Indian shipyards under the yet-to-be-formulated strategic partnership policy. This was essentially done with a view to encourage private participation in the defence industry under the government’s flagship “Make in India” programme. Though initially major private shipyards, namely L&T Shipyard, Kattupalli, (L&T), Reliance Naval & Engineering Ltd, Pipavav (RNEL) and ABG Shipyard, Dahej, were in contention, ABG Shipyard was excluded due to its extremely stressed financial condition.

The strategic partnership policy took almost three years to take shape (due to representations from various stakeholders and the nature of the inherent complexities involved) and was finally rolled out in June 2017. In fact the Defence Procurement Procedure 2016 (DPP-2016) was promulgated in April 2016 with the chapter on ‘strategic partnership’ left blank. In the meanwhile it was observed that existing MoD projects with RNEL, namely five naval offshore patrol vessels (NOPVs), 14 coast guard fast patrol vessels (CG FPVs) and one coast guard training ship were getting delayed and the finances of RNEL were showing signs of stress.

Therefore, in June 2017, with most private shipyards failing to live up to their potential due to stressed finances, the MoD apparently decided to include MDL along with RNEL and L&T for the project to improve competition and to avoid a possible single vendor situation. The project has since been revived and as per media reports proposals have been sought by MoD from the same four prospective foreign collaborators.

Going by past track record of the MoD in high-value defence procurement cases, it is likely that at least three years will be taken to evaluate various proposals and select a foreign collaborator for Project 75(I). With cost negotiations and finalisation of the contract taking another year and infrastructure augmentation/training (at the selected Indian shipyard) taking around 18 months thereafter, actual production is unlikely to commence before 2024, which implies that deliveries are not likely to commence before 2028.

As is well known, out of the existing fleet of 14 submarines (including INS Kalvari inducted in December 2017), 12 submarines are between 25 to 32 years old and at the fag end of their service lives. With the growing maritime footprint of the Indian Navy and with increased forays of the Chinese Navy into the Indian Ocean region, the urgent need to beef up our ageing submarine arm has been the topic of several animated discussions.

With submarine production at MDL under the ongoing Project 75 having stabilised and gathering pace over the last couple of years, it is expected that the balance five Kalvari Class submarines (Scorpenes) would be inducted into service over the next three years.

Since the numbers of ageing platforms far exceeds the likely new inductions under Project 75 and since the first submarine under Project 75(I) is unlikely to be ready for induction till 2028, the MoD has reportedly been constrained to examine other options to make good this critical shortage in the vital submarine arm.

Under these circumstances, it is probable that the MoD thought it prudent to exercise the option clause (for three additional Scorpene Class submarines) under Project 75 and have them built at MDL – which already has the necessary infrastructure and skills for the same. This aspect was also reported in the media during the visit of the French president and defence minister to India a couple of months ago.

It can therefore be surmised that the latest news about “nomination of MDL for Project 75(I) sounding death knell for private shipyards” may be referring to the MoD exercising its legitimate option clause in the existing Project 75 contract to tide over critical shortages in the submarine arm.

While the MoD may have been able to tide over its immediate problem by exercising the option clause, it will be extremely difficult, indeed almost impossible, for the private shipyards to survive without orders for another 3-4 years till the finalisation of order for Project 75(I) – which could in effect sound their death knell if they are not proactive enough to explore other opportunities.

In fact, MoD has been unable to finalise the order for the long-delayed Landing Platform Dock (LPD) Project for four ships costing approximately $3 billion despite receiving revised price bids from the two private shipyards in fray (L&T and RNEL) almost a year ago. It is informally learnt that poor financial status of one of the two private shipyards in the fray has stalled progress in the case due to fears of a possible single vendor scenario in case of disqualification of one on financial grounds.

However, notwithstanding the present financial crisis, it is a well known fact that almost all private shipyards have created excellent infrastructure over the years.

Therefore, it would not be in our national interest to allow them to collapse, particularly since public sector (PSU) shipyards alone will not be able to meet the projected requirement of the navy (200 platforms by 2027) and coast guard due to their inherent constraints in terms of capacity and efficiency.

Larger Picture

So how can the private shipyards survive and flourish in the interim? To start with, shipyards with a backlog of orders need to inspire confidence in the MoD by executing them in a time-bound manner without further delays. Besides waiting for high-value MoD orders to come their way, these shipyards also need to explore opportunities in the international and commercial market market especially since a ship-building subsidy was reintroduced by the government in 2015 to make Indian shipyards more competitive. The fast-growing worldwide offshore patrol vessels (OPVs) market – 276 ships valued at about $60 billion planned by 30 countries with a year on year growth of approximately 4% as per Global Offshore Patrol Vessel Market Report 2015-2016 – presents an excellent opening in this regard.

Opportunities arising out of the much-touted Sagar Mala Project, and utilisation of coastal and inland waterways for transportation could also be explored through the shipping ministry. After all, private shipyards were originally set up to cater to the needs of commercial shipping/offshore structures/vessels and it is only post 2010 that they started looking at defence orders. So in a sense it may not be entirely fair to blame the MoD for the plight of private shipyards. In fact, while the MoD quality standards are very stringent, the payment terms are quite liberal and accommodative.

On the MoD’s part, there is an urgent need to standardise designs of platforms (ships/submarines/auxiliaries) and have them built in large numbers to achieve economy of scale and increase speed of construction. Design standardisation would also help in correct cost estimation, quick contract conclusion and expeditious construction. Training, operation, maintenance and logistics support post induction would become easier, reducing revenue expenditure substantially. This would also encourage vendors to invest in better technology, giving a fillip both to indigenisation and quality. A mere glance at the achievements of leading shipbuilding nations would reveal the benefits of standardisation.

Further, as an immediate measure, the intriguing decision of the government to acquire four upgraded Talwar Class Frigates (costing approximately $4 billion) from Russia (two to be built in Russia and two to be built in India through technology transfer) despite the more potent and proven indigenous Shivalik Class Frigates, with improved stealth features, already being in service since 2010 needs to be reviewed. In fact, this decision of the government goes against its own stated policy of ‘Make in India’. Cost-wise too, the Shivalik Class would be about 20% cheaper than the upgraded Talwar Class, which means that the Indian Navy would be able to acquire five or six of the former for the cost of four of the latter.

Moreover, we know from experience that acquisitions from abroad are often fraught with uncertainties in terms of cost, time, technology transfer, coordination etc., making the entire process very complex and extremely challenging at the best of times. Ordering additional Shivalik Class Frigates would also help in speedy replacement of ageing frigates/destroyers – half (12 out of 24) of which are 20-30 years old and highly maintenance intensive resulting in huge revenue expenditure.

Since the Shivalik Class design is available with the MoD and since material package/as built cost are known, it would be easy to finalise order in a short period of time. In fact, the order could even be shared between two or three professionally managed Indian shipyards with a proven track record and sound finances. This would inculcate a spirit of healthy competition among shipyards and enable bench marking of their performance against a common yard stick. These benchmarks could be used effectively to grade the shipyards and decide on future orders.

Similarly, designs for all naval and coast guard auxiliary vessels like tugs, barges, ferries, oilers, lighters etc. could be standardised and these vessels sourced exclusively from small professionally managed and financially sound private shipyards with proven track record.

Stressed finances and poor delivery track record have been the bane of most private shipyards. The resultant trust deficit has made the MoD wary of placing additional orders on them. PSU shipyards too have their own constraints in terms of capacity and efficiency, and hence will not be able to meet the projected requirement of the navy and coast guard on their own.

The MoD, therefore, needs to leverage the strengths of PSU shipyards as well as financially sound and professionally managed private shipyards through appropriate distribution of work to ensure that infrastructure created within the country is put to the best possible use. Allowing the existing shipbuilding infrastructure to collapse due to indecision would be a pity and not auger well for a proud sea-faring nation like ours, with a 7,500 km coastline.

Commodore K.S. Subramanian, NM, IN (Retd) is the former Director (Shipbuilding) of Hindustan Shipyard Ltd, Visakhapatnam